Offshore banking

List of offshore financial centres

Offshore financial centres include:

  • Antigua and Barbuda
  • Bahamas
  • Barbados
  • Belize
  • Bermuda
  • British Virgin Islands
  • Cayman Islands
  • Channel Islands (Jersey and Guernsey)
  • Cook Islands
  • Cyprus
  • Dominica
  • Gibraltar is no more an offshore centre since 30 June 2006. No new Exempt Company certificates are being issued from that date. 
  • Ghana 
  • Hong Kong
  • Isle of Man
  • Labuan, Malaysia
  • Liechtenstein
  • Luxembourg
  • Malta
  • Macau
  • Mauritius
  • Monaco
  • Montserrat
  • Nauru
  • Panama
  • Saint Kitts and Nevis
  • Seychelles
  • Liechtenstein
  • Turks and Caicos Islands

 

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

  • greater privacy (see also bank secrecy, a principle born with the 1934  Banking Act)
  • low or no taxation (i.e. tax havens)
  • easy access to deposits (at least in terms of regulation)
  • protection against local political or financial instability

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including  banks and those of other landlocked nations such as Luxembourg and Andorra.

Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements, the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts—which may or may not benumbered bank accounts—they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting thatOrganisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

Advantages of offshore banking

  • Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, developed countries with regulated banking systems offer the same advantages in terms of stability.
  • Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.
  • Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.
  • Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.
  • Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.
  • Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.
  • Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Disadvantages of offshore banking

  • Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in an offshore branch of an Icelandic bank in the Isle of Man). The Isle of Man Depositors had not received a full refund even after 11 months, although by mid November 2009 90% of the claimants were paid. The Isle of Man compensation scheme guarantees £50,000 of net deposits per individual depositor or £20,000 for most other categories of depositor, so potential depositors should be aware that any deposits over that amount are at risk.
  • Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.
  • Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.
  • Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy. The Laffer curve demonstrates this tendency.
  • Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality.

Depositors of offshore bank accounts should be aware that they are not tax free savings and that tax is stopped at source by the Isle of Man Government and paid to the UK or country of residence of the depositor.

European Savings Tax Directive

In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.

Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.

Banking services

It is possible to obtain the full spectrum of financial services from offshore banks, including:

  • deposit taking
  • credit
  • wire- and electronic funds transfers
  • foreign exchange
  • letters of credit and trade finance
  • investment management and investment custody
  • fund management
  • trustee services
  • corporate administration

Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.

Statistics concerning offshore banking

Offshore banking is an important part of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting's “World Wealth Report” for 2000, one third of the wealth of the world's “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts.

The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. "These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption" commented Lucy Komisar quoting these statistics. Among offshore banks,  banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion  francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. 

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